GDP – How far will it fall in 2020? How fast will it recover?

BRAZIL ECONOMICS - Report 09 Sep 2020 by Affonso Pastore, Cristina Pinotti, Paula Magalhães, Marcelo Gazzano and Bruno Cordeiro

With the contraction of 9.7% in the second quarter, and the revision of the first-quarter result to -2.5%, Brazil’s GDP accumulated a decline of 12% in the first six months of 2020. There are no doubts that the bottom of the well has already been reached, but doubts persist about the pace of recovery, and how much GDP will shrink in 2020 in relation to 2019. Just as happened between 2017 and 2019, the driving force of the cyclical recovery will be increased household consumption, and the reason for the divergent forecasts is the different views about its behavior. Concurrent with the stimulus provided by the emergency relief is the damper effect (supposedly temporary) from the “circumstantial saving”, which is a consequence of social distancing. The hypothesis of those who are in the upbeat group is that when the emergency relief ends, it will be compensated with a decline of circumstantial saving. One of the objectives of this report is to analyze this hypothesis, and our conclusion is that the persistence of the circumstantial saving depends on the social distancing behavior, whose dynamic is still unknown, but will certainly be affected by the evolution of the contagion rate and the number of deaths per day. The high uncertainty is reflected in the wide interval of the projections of the Focus survey, whose median indicates contraction of GDP of 5.3% in 2020, but with a range from -1.6% to -9.1%. For reasons that will be described in this report, our projection for GDP contraction in 2020 remains near the midpoint of the interval between 6% and 7%, indicating that the recovery will be slow.

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